Jira Code: ME-33-Cost center
Concept
A cost centre is a department within a business to which costs can be allocated. The term includes departments which do not produce directly but incur costs to the business. when the manager and employees of the cost centre are not accountable for the profitability and investment decisions of the business but they are responsible for some of its costs.
There are two main types of cost centres:
- Production cost centres, where the products are manufactured or processed. Example of this is an assembly area.
- Service cost centres, where services are provided to other cost centres. Example of this is the personnel department or the canteen.
Examples
- Marketing department
- Human resources
- Research and development
- Work office
- Quality assurance
- Engineering
- Logistics
- Procurement
Function
The main function of a cost centre is the tracing of all expenses linked with a certain function. For example, by considering a call centre as an independent unit, the firm can calculate how much it is spending each year for its 1-800 support service. If a cost centre is not considered independent then it would take a lot of effort in measuring the cost of providing this service because it will include dividing up the company’s entire personnel and phone bills by department each month.
Cost allocation
Cost allocation is the process of identifying, aggregating, and assigning costs to cost objects. A cost object is any activity or item for which you want to separately measure costs. Examples of cost objects are a product, a research project, a customer, a sales region, and a department.
Cost allocation is used for financial reporting purposes, to spread costs among departments or inventory items.
Example of Cost Allocation
The African Bongo Corporation (ABC) runs its own electrical power station in the hinterlands of South Africa, and allocates the cost of the power station to its six operating departments based on their electricity usage levels.
(The total expense of that company is allocated to its six operating dept. According to their usage of electricity)
Reasons Not to Allocate Costs
An entirely justifiable reason for not allocating costs is that no cost should be charged that the recipient has no control over. Thus, in the African Bongo Corporation example above, the company could forbear from allocating the cost of its power station, on the grounds that none of the six operating departments have any control over the power station. In such a situation, the entity simply includes the unallocated cost in the company’s entire cost of doing business. Any profit generated by the departments contributes toward paying for the unallocated cost.
Allocation schedule
Allocation schedules transfer balances from expense accounts into one or more other accounts.The allocation schedule record is available only when the Accounting Periods and Expense Allocation features are enabled.If the Statistical Accounting feature is enabled, the allocation schedule record includes fields that enable you to base the weight for the allocation on the balance of a statistical account through statistical journals or as an absolute value. If the Dynamic Allocation feature is also enabled, the weight is dynamically calculated when the allocation journal is generated.
Intercompany allocation schedule
Intercompany allocation schedules transfer a balance from one source subsidiary account to multiple destination subsidiaries for costs that are shared between subsidiaries. The intercompany allocation schedule record is available only in OneWorld accounts and when the Accounting Periods and Expense Allocation features are enabled. If the Statistical Accounting feature is enabled, the intercompany allocation schedule record includes fields that enable you to base the weight for the allocation on the balance of a statistical account through statistical journals or as an absolute value. If the Dynamic Allocation feature is also enabled, the weight is dynamically calculated when the intercompany allocation journal is generated.
Suggestions
We can show allocation wise data of expenses of a company in two ways. One is income statement and the other is general ledger created through allocation schedule. It is as follows:-
- Income statement
We can use income statement to show the expense allocation of different departments of the same subsidiary. It shows the expenses for different departments separately (Filter).
2. General Ledger
- In tally , the cost centre allocation is in journal. We can show it in our book specific journal which is created through allocation schedule.
- Enter bills:-
Transactions->Payables->Enter bills
- Create allocation schedule:-
Transaction->Financials->Create allocation schedule
- Create book specific journal either from allocation or ,
Transaction->Financial->Book specific journal